In Defense of Sterling

Market factors have lined up quite nicely for the U.K. pound, giving it some reprieve after sliding against the dollar for most of the first quarter.

That’s good news for Michael Hewson, senior market analyst at CMC Markets and a sterling bull in the DJ FX Frenzy tournament, which pits traders and strategists’ best weekly foreign exchange trade ideas against each other’s.

There’s more life left in sterling’s gains, as a confluence of market factors has provided a positive backdrop for the currency, he said in an interview on the DJ FX Trader podcast Wednesday. On Thursday, the U.K. pound advanced 0.4% versus the dollar to $1.5396, marking a 2% rise since mid-March.

The pound has largely been left out of the foreign-exchange market limelight for much of this year, as the prospect of the Federal Reserve tapering off its stimulus program and euro-zone debt crisis worries led to the dollar and euro stealing much of the show.

“Everyone’s been very sort of down on the pound recently,” Mr. Hewson said.

But recent better U.K. data and a bazooka stimulus program from the Bank of Japan are changing the market’s tune on sterling. Mr. Hewson says that with investors pulling money out of the yen, sterling could be a key beneficiary.

“What you’re getting is a rotation of capital [out of] the lower yielding yen into the slightly higher yielding sterling or euro,” he said.

That’s clear from the recent sterling moves versus the yen, with it gaining 9.1% since April 4 to trade at 153.65 yen on Thursday.

In addition, the U.K. pound still has the potential to act as a haven currency if euro-zone jitters flare up again, as was the case last year, and the Bank of England’s scope to print more money is “very, very limited,” he says. Going forward, he expects sterling to trade in a range of $1.50 – $1.60.

For more of Mr. Hewson’s views on sterling and the euro, and DJ FX Trader columnist Vincent Cignarella’s thoughts on sterling as a safe-harbor currency, listen to the DJ FX Trader podcast.

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